The Turkish government has enacted drastic tax measures to curb car imports as it scrambles to ease a foreign exchange crunch. The move aims to encourage the sale of locally produced vehicles, but its impact remains questionable in a country where demand for imported cars has been traditionally high.
An ongoing flight of foreign capital, coupled with a sharp decline in hard currency revenues from exports and tourism during the coronavirus pandemic, have brought Turkey’s current account deficit to some $30 billion, with Ankara losing control of foreign exchange prices despite costly efforts to keep them in check. The price of the dollar shot up more than 7% in a mere month, hitting the region of 7.35 liras in mid-August.
The demand for foreign exchange has been driven mainly by importers, entities indebted in hard currency and savers who see foreign exchange as a safe haven to preserve the value of their money.
The government had already introduced a series of measures to suppress imports. In its latest move Aug. 30, it announced big hikes in the special consumption tax levied on automobiles in a bid to curb the importation of cars. The tax hikes translate to price increases of 13% to 20% on imported and bigger engine-capacity cars. The changes were touted as a move to protect domestic production, with the prices of locally manufactured cars expected to decrease by 3% to 6% in the short run. Though Turkey has become a net exporter in the automotive sector, demand has remained high for imported cars, for which the country pays something between $10 billion and $12 billion per year.
Turkey’s current account deficit, which stood at about $20 billion in the first half of the year, is estimated to have reached $30 billion at the end of August. The Turkish economy — already fragile before the COVID-19 crisis — contracted nearly 10% in the second quarter. Domestic demand plummeted in April and May amid pandemic lockdowns. After economic reopening began in early June, Ankara encouraged a loan bonanza to spur consumption, but the fast economic warmup not only fueled inflation but also stoked imports, worsening the current account deficit. And without a meaningful inflow of foreign capital, the gap had to be financed with the central bank’s already depleted reserves. Eventually, Ankara was forced to revert to cooling the economy as the lira nosedived anew in early August.
The foreign trade data show that gold was the primary import item last month. Gold imports were worth a record $4.2 billion in August, reaching $16 billion in the first eight months of the year — a 119% increase from the same period last year. Automobile imports, meanwhile, were worth $7 billion in the first eight months of the year.
The car market in Turkey was unusually lively from May to July, with demand — especially for imported cars — well above the average in the past decade. The used market, in particular, saw an extraordinary boom. The uptick in demand stemmed from a rise in both the car ownership trend and the seasonal profitability of the car trade. Because of the pandemic, many who had no plans to own a car grew reluctant to use public transportation and planes, pushing up the rate of automobilization.
The demand for automobiles was driven also by the abundance of cheap credit by mid-August. Ankara’s effort to warm up the economy through a loan expansion led by public banks aimed to accelerate car sales, among others. Loans with attractive repayment terms, including interest rates below the consumer inflation rate of about 11%, spurred a strong demand for cars. Many saw cars, both new and used, as a form of investment and made considerable profits, taking advantage of the fluctuations in foreign exchange prices and the drop in loan interest rates.
According to the Turkish Statistical Institute, consumer prices rose about 7.5% in the first eight months of the year, while the prices of diesel cars rose by 46% and those of gasoline cars by 33% in the same period, driven primarily by the increase in foreign exchange prices. Those who bought cars while the dollar was worth 6.8 liras made big profits from the increase in car prices as the dollar hit 7.4 liras in a matter of weeks. The reason for the higher increase in diesel car prices owed to tax hikes on the account of environmental damage. As a result, market shares were reversed, with gasoline cars representing 51.5% of car sales in the first eight months of the year and diesel cars, which usually top the list, 41.2%.
Though Turkey’s automotive sector enjoys a foreign trade surplus, the level of imports remains high. Imported cars account for about three-quarters of cars sold on the domestic market.
Automotive imports were worth $6.6 billion in the first seven months of the year, while exports stood at about $11.2 billion. This meant a foreign trade surplus of $4.5 billion, but it was less than a half of the $10.5 billion surplus in the same period last year as exports dropped by $4.8 billion and imports increased by $1.2 billion. In other words, while the European car market contracted sharply under the impact of the pandemic, the one in Turkey grew due to peculiar dynamics that encouraged imports.
Thus, the tax hikes are aimed at deterring imports and steering the remaining demand to locally manufactured cars. Yet, given the import-dominated domestic market, the shift is expected to be more to the used market. Furthermore, restricted imports raise the specter of business loss in sub-sectors such as car dealership and maintenance. How much local production will replace imports remains to be seen.